Michael Pickhardt

Size and scope of the underground economy in Germany

The objective of this paper is to improve estimations of the size and scope of the underground economy by introducing a new approach that combines the advantages of the two most commonly used approaches, i.e. currency demand and multiple indicators, multiple causes (MIMIC). The new approach is applied to Germany. Among other things, it is shown that the approach yields improved estimation results. Some policy perspectives are discussed in the concluding section.

Fifty Years after Samuelson's “The Pure Theory of Public Expenditure”: What are we Left With?

In 1954, Paul A. Samuelson presented on just two and a half pages what he claimed to be “a pure theory of government expenditure on collective consumption goods†(1954c, p. 388). Just a year later, he supplemented this theory by an equivalent diagrammatic formulation and a few clarifying comments (Samuelson 1955). Although his initial paper was strongly criticized on various grounds, an industry was launched and public goods—or, as referred to initially by Samuelson, collective consumption goods—now play a crucial role in a number of theories like fiscal competition or endogenous growth, and in almost all textbooks on public economics or microeconomics at least a paragraph is devoted to public goods. In fact, Samuelsons 1954 paper is conventionally considered the foundation of the modern theory of public goods (for example, see Richard A. Musgrave 1983a, p. 141). However, the many contributions to the modern theory of public goods, including Samuelsons subsequent writings, have revealed that there is widespread disagreement both on fundamental aspects of the theory as well as on its significance for the determination of government expenditure.

Teaching Public Goods Theory With a Classroom Game

The author extends the work of Holt and Laury (1997) on a simple noncomputerized card game for teaching the essential aspects of public goods theory. He suggests a course of several lectures and discusses the behavior of subjects in various game sessions. Among other things, the results provide experimental evidence with respect to the private provision of public goods. Other aspects discussed include anomalous behavior patterns and a critical review of the game. He provides student exercises in the appendix.

Some remarks on self‐interest, the historical schools and the evolution of the theory of public goods

Purpose – This paper is devoted to the question of what motivates man in his pursuit of economic activities. Particular attention is given to the notion that economic activities of individuals may not be motivated by their self-interest alone. Design/methodology/approach – Using literary analysis, the paper first reconsiders the role of self-interest and non-selfish motives in the historical schools. Then it is demonstrated that at least some non-selfish motives were incorporated in the voluntary exchange theory of public economy. Next it is shown that during the evolution of the theory of public goods these non-selfish motives were lost and that the modern theory of public goods rests entirely on the self-interest hypothesis. However, over the last two decades results of public goods experiments have cast considerable doubt on the pure self-interest hypothesis. Findings – A major finding of this paper is that several non-selfish motives of man that show up in recent public goods experiments were already discussed by representatives of the historical schools. Research limitations/implications – An agenda for future research on the topic is sketched in the final section. Practical implications – Practical implications include that the allocation of many goods, not just public goods, may improve if agents pay more attention to non-selfish motives of man. Originality/value – The paper adds to the existing body of related writings by linking developments in the evolution of theory of public goods, in particular recent findings from public goods experiments, to a specific aspect already advocated by representatives of the historical schools, that is, the notion that man in his pursuit of economic activities is not motivated by his self-interest alone. To this extent, the paper is of interest for researchers working on public goods theory, experimental economics and the history of economic thought.

Lapse of time effects on tax evasion in an agent-based econophysics model

One of the first approaches to theoretically account for tax compliance was given by Allingham and Sandmo, which incorporates tax rates, potential penalties and audit probabilities as basic parameters in order to evaluate the behavior of expected utility maximizing tax payers. However, it was realized early on that one of the major shortcomings of the Allingham and Sandmo theory is the prediction of much too low levels of tax compliance, as actually observed in industrialized nations. It is believed that these shortcomings are partially due to the insufficient consideration of interaction dynamics among the actors of the tax compliance game, i.e., tax payers, tax advisors, tax authorities, and tax law makers. Another reason might be that many analyses have not incorporated backauditing. Although Allingham and Sandmo already considered backauditing (or lapse of time effects) as a possible extension of their basic theory, the issue of backauditing has been largely neglected in the literature. Noteable exceptions are Alm et al., Antunes et al. and Hokamp and Pickhardt. It is for these reasons that agent-based models have been set up as a comparatively new tool for analyzing tax compliance issues. In fact, an essential feature of any agent-based model is the direct non-market based interaction among agents, which is combined with some process that allows for changes in individual behavior patterns. Therefore, agent-based tax evasion models may be categorized according to the features of this individual interaction process. In econophysics models this process is commonly described within the Ising model where examples include Zaklan et al., Lima and Zaklan, and Lima. In contrast, if the interaction process is driven by parameter changes that induce behavioral changes via a utility function and (or) by stochastic processes that do not have physical roots, these models belong to the economics domain. Examples include Mittone and Patelli, Davis et al., Bloomquist, Korobow et al., Antunes et al., Szabó et al., Meder et al., Hokamp and Pickhardt, of which some are summarized by Bloomquist and Pickhardt and Seibold. In all agent-based tax evasion models the actual patterns and levels of tax evasion depend on two additional factors: the network structure of society and the tax enforcement mechanism. The network structure is implemented by alternative lattice types and tax enforcement consists of the two economic standard parameters audit probability and penalty rate. In the present paper we study the effect of alternative backauditing schemes on tax evasion within an multi-agent econophysics model. Moreover, backauditing also enables us to incorporate endogenously determined penalty rates. Both features, backauditing and endogenous penalties, contribute to the microfoundation of econophysics models and, therefore, allow for a more realistic modelling of tax compliance behavior within this modelling frame. We present our model and formalism in Sec. II. Results are analyzed in Sec. III, where we discuss first the case of homogeneous societies in Sec. III A, which is then compared with the tax evasion of multi agent societies in Sec. III B. We conclude our considerations in Sec. IV.

The hard shadow of the Greek economy: New estimates of the size of the underground economy and its fiscal impact

This article presents new estimates of the Greek underground economy and explores the link between the underground economy and aggregate debt. We show that the Greek underground economy has been underestimated heavily and has been on a rising trend again since Greece adopted the Euro. We also present evidence that the size of the underground economy is positively related to the debt-to-GDP ratio, implying that fighting the underground economy is also conducive to financial and macroeconomic stability. Our results suggest that for our sample of 11 EMU member countries, the loss of the inflation tax as an economic policy instrument had drastic consequences. While the underground economy did not have a statistically significant impact on aggregate debt before the introduction of the Euro, it has pushed up the debt-to-GDP ratio in our sample since.

Tax Evasion and the Shadow Economy

Leading scholars examine recent evidence from theoretical and empirical research on tax compliance and tax evasion, and provide an in-depth analysis of underlying methods. Strategies to fight tax evasion are evaluated and the motivations behind it are explored, as are the impact and size of the shadow economy in Europe. As well as promoting a better understanding of the issues, this book intends to stimulate further debate and, in so doing, broaden the exchange of ideas and concepts.

Electricity transmission pricing: The German case

This paper elucidates the German electric power market, especially the electricity transmission pricing system that has been in force since January 2000. This paper points to several distorting pricing features, as well as to grid access problems, and suggests that a regulation office should be established. Moreover, it is argued that an independent grid operator for the entire German grid would enhance its efficient operation, and thereby increase the overall efficiency of the German electric power market. In addition, the actual cost structure and calculation procedure of a German grid operator is described in some detail.

Introduction to the special issue on tax evasion and the underground economy

The current sovereign debt crisis in several European countries demonstrates impressively the social and economic significance of tax evasion and the underground economy. Economic research and analysis is required to understand and to fight effectively these developments. This volume contributes empirical, simulative and theoretical evidence on tax evasion and the underground economy. The contributions originate from an international conference on “The Shadow Economy, Tax Evasion and Money Laundering”, held at the University of Munster, Germany, in July 2011. This conference brought together researchers from 25 countries with a view to discuss the most recent topics in these research areas. Further details are available from the conference homepage at http://www.wiwi.uni-muenster.de/shadow2011/. Eight papers were chosen to best represent edge cutting research advances in the analysis of tax compliance and the underground economy.

The Nature of Tax Evasion and the Shadow Economy

Leading scholars examine recent evidence from theoretical and empirical research on tax compliance and tax evasion, and provide an in-depth analysis of underlying methods. Strategies to fight tax evasion are evaluated and the motivations behind it are explored, as are the impact and size of the shadow economy in Europe. As well as promoting a better understanding of the issues, this book intends to stimulate further debate and, in so doing, broaden the exchange of ideas and concepts.